Simulating the Economic Effects of Romney's Tax Plan

October 15, 2012

A recent study by the Tax Policy Center (TPC) has painted Mitt Romney's tax plan as a cut for high income earners and a hike for low to middle income earners. However, the study does not assume the dynamic effects that Romney's tax plan has for the overall economy in the long run, say Stephen Entin and William McBride of the Tax Foundation.

Romney's tax plan has several provisions, five of which were modeled by the Tax Foundation to find their effects on the overall economy.

First, a 20 percent reduction in individual marginal income tax rates in all brackets.

Second, an elimination of tax on capital gains and dividends for lower and middle income tax taxpayers.

Third, an elimination of the alternative minimum tax.

Fourth, a reduction of the corporate income tax rate from 35 percent to 25 percent.

Finally, an elimination of the federal estate tax.

Together and separately, each of these provisions would have stimulating effects for the overall economy.

The actual and potential gross domestic product (GDP) would rise by 7.4 percent over a five to 10 year adjustment period.

Furthermore, the private sector would grow about 7.8 percent.

Of that growth, two-thirds of it would go toward labor income in the form of more hours and higher wages.

Moreover, capital stocks would grow by about 18.6 percent.

Additionally, low-income earners would have between $200 and $3,500 more in after-tax income.

Romney's tax plan is a viable solution for an economy plagued with budget concerns and high unemployment rates. The TPC looked at only the direct effect of Romney's tax proposal but failed to take into account the revenue gained from external factors. For instance, the lower corporate tax rate would encourage job creation by incentivizing the use of more plants, buildings and equipment.

If the tax plan were budget neutral, any revenue shortfalls could be made up in reductions in government spending. For example, the government can sell some of the assets it possesses, such as land, to make additional income. Moreover, it can cut about a third of corporate welfare, such as subsidies to large corporations, to offset any decline in revenue.